Tuesday, April 29, 2014

New Math: Breaking Down Industry Changes - Part 1

The announced industry changes have been a whirlwind of drama across every media.  I wanted to save this post for when ALL the blogs were released... but most of my peers have jumped the gun.  There is a lot to cover, so I will be breaking up my response as well.  Let's focus on the first two devblogs for now.

Other Blogs: as of Industry UI devblog release
Before I start working things through, let me highlight something for the non-industrialists.  There are two inescapable limits to production: Hours per week, and weight of freight.   

Everything You Knew Is Wrong

To analyze these changes, we really need to throw out all our classical assumptions around production.  Most of the shortcuts and tricks are going away, and we're going to be faced with a new paradigm.  Those who are barking most (lowsec capital producers) really are missing the entire scope of how the environment is changing.  And the demise of highsec industry is greatly exaggerated.  

The biggest cries are coming from lowsec capital producers.  In an effort to address the loudest dissenters, I want to walk through the changes from their perspective step for step.

I've highlighted the widely used flow chart most independent capital producers use.  The point in this flow is that it's extremely linear.  For the uninitiated, the primary bottleneck for capital production looks like freight.  For the capital producing professional, T1 compression moves that bottleneck to BPO count.  Compression makes the freight step nearly trivial, compressing a supercarrier into two JF trips.

The announced reprocessing changes break the compression link in this chain.  Without compression, freight becomes an enormous bottleneck.  With a large library of BPOs, builders are scrambling to figure out how they will meet the same throughput.  The short answer for the vast majority of these producers is: they won't be able to produce the same number of capitals they are used to... without some serious logistical horsepower.

Then The Fire Nation Attacked

Without compression, large-scale/solo capital producers are left in a lurch. This really changes up the build cycle for these producers.

full res: imgur

To keep heavy capital production running, ore compression is the only reasonable tool left for the builder.  This will completely change up the cost scheme for production.  Rather than basing final costs off raw minerals, like they are today, savvy capital builders will be required to balance compression with added costs of compressed ore.  Very simply: compressed ore will not cost the same as the sum of its parts, if it has a favorable compression ratio.

Next, we get to why low sec capital producers are so annoyed.  With reprocessing changes, it will take different amounts of those compressed ores to get the raw materials required.  Somewhere around 5% more ore will be required to build a capital, using compression, in lowsec.  Also, low sec producers will be forced to use POS to get the best refining rates, which will add another cost to the chain.

Lastly, there are the changes to production costs.  With the removal of slots, station-builders will be forced to pay up to 14% surcharge on their jobs.  CCP has hinted that outpost owners will not be able to zero this cost out, meaning those lowsec producers have an opportunity to make back that 5% loss they had to spend on their POS.  There will still be a considerably heavy freight step to get capital parts out of a POS, which could prove to either be too much effort to justify the ISK/hr, or too much risk to even start the process.

It's also worth noting that with copying becoming far more viable, that these low sec factory POS start to look half way worth it.  Even if that adds another step to the chain, most capital producers will have spare research time available on their toons, and copy mules are reasonably cheap.

It's Different, I Hate It

Before writing your farewell post and giving away all your assets, let's think through the whole chain.  Though null gets an obvious boost from this change, putting teams of miners to work in rental corps across the frontier, it's not simply a nerf-lowsec/boost-nullsec change.  There are a lot of steps being added to the chain.  The more steps in a process, the more opportunities for added value:
  • Miners will be compressing their materials rather than refining them
    • This incurs POS/fuel costs to the raw minerals
  • Compressed freight is worthless until it gets in the hands of a producer
    • Refining low-ends for shipping will be discouraged in null
    • High-end supply to hubs should remain mostly flat
    • Trit/Pyre will come mostly from inefficient high sec
  • Demand for efficient compressed ores (ABC) will drive added value for ores
  • POS required for most miners and producers, for best reprocessing yield
  • Production line fees could kill profits.  POS required for mitigating cost, at additional risk
The point: there are a lot more permutations in production than before.  As such, there should be a much wider margin on complicated products for the mid term.  I think valuations will settle near the production costs of lowsec, meaning anyone still in the game will need to be very diligent to keep their profits.  But, also note that now with the difficulty curve increased, many capital builders have given up the market.  This is a great opportunity to get your hands on researched BPOs, and if you have a diligent plan, could still stand to profit.  May require some help though.

Author's Note: This post was written before the the Research changes were officially announced.  More to come soon(tm)